The largest bank merger since the Great Recession was completed on Dec. 6 as SunTrust and BB&T became one. The new company, called Truist Financial (NYSE:TFC), instantly became the sixth-largest bank in the country.
Research shows that most mergers don't work out. But I see reason to think Truist should do well for investors.
First, a little background
Truist Financial is based in Charlotte, N.C. It has about $442 billion in assets under management, $301 billion in loans, and roughly $324 billion in deposits.
The transition to the Truist brand will take about two years. Until then, customers of both BB&T and SunTrust will be served through their respective bank branches using the same apps, websites, and services as before the merger closed. As part of the regulatory approval process, the new company will sell off 30 SunTrust branches in North Carolina, Virginia, and Georgia to First Horizon Bank and divest $2.4 billion in deposits to "mitigate the competitive effects of the merger," according to the Federal Reserve.
Over the next two years, the new leadership team -- led by Chairman and CEO Kelly King, who held the same title at BB&T, and President and COO Bill Rogers, who was chief executive of SunTrust -- will be navigating the company through choppy market conditions for banks. On Sept. 12, 2021, Rogers will become president and CEO, while King will become executive chairman; then, on March 12, 2022, Rogers will take over as chairman.
Here are three reasons I like their chances.
1. Big expense reductions
Both companies come to this merger on solid footing. Truist's stock price (formerly BB&T's) is up almost 30% year to date, while SunTrust's stock was up about 40% when it stopped trading. BB&T saw revenue increase 2.5% in the third quarter compared to the previous year, while SunTrust's grew 2.6%.
The merger is expected to result in an overall expense reduction of $1.6 billion by 2022. Some of it will be achieved through merging the various technology systems, such as eliminating redundant hardware and software systems. The result will be to create best-of-breed technologies, taking the best systems from each company and merging them into one. Savings will also come from removing duplicative positions and spending less on third-party vendors, particularly where there is overlap. Further, the company will reduce its real-estate footprint with branch closures, but those won't occur until after year one. The specific cuts and the timeline of cost reductions won't be revealed until next year as plans develop.
Ultimately, Truist is targeting an efficiency ratio (that is, operating costs divided by net revenue) of 51%, which would make it a market leader among large banks. Admittedly, the company has a long way to go; in the third quarter, BB&T's efficiency ratio was just above 61%, while SunTrust's was 62%.
2. Investments in innovation
The money saved from reducing expenses will be funneled in large part to investments in technology and innovation. Truist is planning to open an innovation and technology center in its Charlotte offices. This center will serve as a lab for new banking technology, King explained on BB&T's third-quarter earnings call. The idea is to create new products and services to improve the lives of customers, King said. "That's what this whole innovation center is all about."
There's a strong appetite to invest, and transition teams have already been prioritizing where to do so, Rogers said on SunTrust's third-quarter call, with some investments already in the queue or under way. The two merging banks have complementary strengths. BB&T's strength is its community banking and insurance operation, while SunTrust's strengths are corporate and investment banking and its digital consumer lending platform.
The investments will provide an opportunity to enhance those strengths.
3. Been there, done that
It's important to note that both companies came from mergers and have significant experience in executing them. BB&T essentially formed from a merger of equals in the mid-1990s with Southern Bank. Since then, BB&T has absorbed dozens of acquisitions, many since King became CEO in 2009.
SunTrust formed in 1985 from the merger of the Trust Company and SunBanks and has also absorbed dozens of acquisitions since then. Combined, the two banks have integrated more than 100 acquisitions over the past 35 years. While none of them have been even close to this scale, the history and experience should serve them well in this endeavor.
The culture question
One thing we don't have much color on yet is how well BB&T's and SunTrust's cultures will fit.
Many mergers fail because the companies coming together prove not to be a cultural fit. This will be a huge question going forward, but the two companies seem keenly aware of the potential pitfalls. "Culture isn't a day-one event," King said on BB&T's third-quarter earnings call; rather, it's a work in progress. The new company has worked with consultants on the culture question and has gotten positive feedback so far. King said the company has done an "incredible amount of work" in preserving the cultures and merging them into one.
"We just haven't had an issue where it's the BB&T way or it's the SunTrust way. We automatically put those in the middle," Rogers said on SunTrust's last earnings call. The two leaders will strive to make sure there's "no light between us" in terms of purpose, mission, and values, he said. "If we see light between us or between our teams, we get on it immediately," Rogers said.
Worth a deposit?
Overall, the Street is fairly positive on the company and expects earnings per share to climb next year. I also think there's a lot to like about the new Truist. As it works through its improvements in efficiency and innovation, the company should turn out to be a strong player in the sector.